Weekend Reading: Blowout Jobs Report, Is The Government Lying?

| About: SPDR S&P (SPY)

Summary

Non-farm payrolls increased by 255,000 in July.

Some investors believe that job numbers are misleading.

Lowering labor participation rate does not imply a hidden problem.

Low continuing jobless claims dispel the myth that more and more people are becoming unemployed.

Higher labor participation among seniors does not conflict with the idea that age is the major cause of falling labor participation.

It's another blowout jobs report. After the report of falling durable goods order last week (-4% from May to June), the market (QQQ, DIA) was a bit shaky at the beginning of the week; but now we are looking at new all-time highs for the S&P 500 (NYSEARCA:SPY). At the time of writing, the S&P 500 is trading at an all-time high of 2,180.

Non-farm payrolls increased by 255,000 in July, furthermore, June's figure has been revised upward from 287,000 to 292,000. This represents 67 consecutive months of positive job growth since the beginning of 2011. There were many times when we came close to negative growth, but there were also many months when growth were a lot higher. Remember that little "incident" we had in May? It doesn't look so significant now. To be honest, I never found it to be very significant anyways (read Don't Be A Contrarian)

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The labor market is the engine of the economy, and the engine appears to be well oiled.

Despite positive growth week after week, many investors are still wary of job numbers. Many readers are claiming that the unemployment rate of 4.9% is not reflective of the current state of the economy. Now let's go with the premise that the data is correct, could the government be misrepresenting the current economic condition?

One growing concern is the falling labor participation.

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The fact that it is falling is not concerning when viewed in isolation, but skeptics are saying that it is shrinking due to less benign reasons. One popular opinion is that the decline is caused by people who are no longer looking for work. In such scenarios, they wouldn't be considered to be unemployed nor would they be a part of the labor force. Taking away an equal amount from the unemployment formula's the numerator (unemployed) and the denominator (labor force) artificially yields a smaller quotient (i.e. lower unemployment rate). If that is the case, then there would certainly be a cause for concern.

To dispel this myth, we only need to look at a single factor: continuing jobless claims.

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In the chart above we can see that the number of people receiving unemployment benefits have declined significantly over the past five years. This corroborates with the aforementioned job growth and low unemployment. If there is a meltdown in the labor market, we should be seeing something like this instead:

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Note the steady climb as the economy deteriorated.

Instead of discrediting government figures, there is a much simpler explanation for falling labor participation: seniors are leaving the labor force. Since a retired person does not want work, he or she would not be counted as a part of the labor force, shrinking the numerator of the labor participation formula. Because the denominator (population) stays the same, the labor participation rate will decrease as the population gets older. Though I believe that much of the decline in labor force participation can be explained by age, a reader did raise an interesting point: how do we explain the rising labor participation rate of people aged 65 and higher?

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The answer is that while the seniors' labor participation rate is rising, the absolute level of labor force participation is still much lower than that of people aged 25 to 54 years (i.e. prime), which is around 80%. This means that as the population ages, seniors' low labor participation rate will still drag down the overall rate.

The rising rate of labor participation among seniors could be a symptom of other problems, such as rising healthcare cost, forcing seniors to work for longer. However such implications are much more of a social problem than an economic one.

Conclusion

A blowout jobs report extends the number of consecutive months of positive growth to 67. The current labor market reflects my opinion that the economy is doing very well. There is no indication that the low unemployment figure is somehow misleading. Continuing jobless claims have declined. Rising labor participation rate among seniors does not discredit the low unemployment rate.

Given the above, I am very confident that S&P 500 can continue to grow.

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